Are the authorised master trusts ready for TPR’s supervisory regime? Part 3 of 3

December 05, 2019

by Fan Jia Senior Associate

Email +44 (0)7419 538420

In the last of our series of blogs reflecting on what we have seen in the authorisation process, we discuss the financial reserves of a master trust (MT).

Funding the financial reserves proved a struggle for some and it could get tougher

To ensure member benefits are protected in a downside scenario, MTs are required to have a rainy day fund that is sufficient to pay for the scheme’s wind-up whilst protecting the members’ savings pots.

While MTs backed by strong funders were able to reach out to their sponsors for support in meeting the reserve requirement, others had to go to other sources to secure extra liquidity. Some MTs raised additional funds, some obtained guarantees from shareholders, and others changed scheme rules to allow the costs of the money purchase section to be met from the assets of the rest of the scheme.

Given the difficulty for some MTs to meet this requirement, a number of MTs might be concerned about where the market is heading and the implications on the financial reserve requirement. As MTs grow, and perhaps acquire the membership and assets of the exiting MTs, their reserve requirements could increase too.

At the same time commercial reality should prevail. The forecasts and performance of MTs compared to some other industry sectors should be relatively easy to analyse and track. It is difficult, but not impossible, to see how a sudden event could cause distress in a MT, after all, revenues are mainly dependent on member numbers and assets under management; both are unlikely to disappear overnight, particularly with the current level of inertia with which many members treat their pension pots. In practice, there should be some visibility of a downturn in performance before it occurs and as a result there should be opportunities to limit the negative consequences.

As the shape of the market stabilises many MTs may wish to revisit the use of the ‘offsetting of revenues’ to reduce the size of their financial reserve, and in turn may seek to reduce the level of ring-fenced cash as this cash could generate better returns elsewhere. Understanding how this can work for MTs might be a feature of ensuring continued investment by shareholders, as we doubt many shareholders will look forward to increasing the cash in their financial reserve as a reward for growing their business.

Most agree that maintaining a strong financial reserve is a sensible and necessary mechanism to protect members, but how this evolves in the tug of war between what is prudent and what is commercial is still on the table.

by Fan Jia Senior Associate

Email +44 (0)7419 538420